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May 26, 2010

Post by Blog Staff

Monday the Supreme Court unanimously held the NFL's practice of collectively licensing the trademarks of all 32 individual teams is not immune from antitrust scrutiny under Section 1 of the Sherman Act. The NFL argued that because the marks are all licensed through a single entity, NFL Properties, there was no "contract, combination, . . . or conspiracy" under § 1, and therefore there could be no antitrust problem.

The Court disagreed. The Court first observed the question of whether there is a "single enterprise" is not dependent on the specific legal structure of the entities. As stated by the Court (internal citations omitted):

The relevant inquiry, therefore, is whether there is a "contract, combination . . . or conspiracy" amongst "separate economic actors pursuing separate economic interests," such that the agreement "deprives the marketplace of independent centers of decisionmaking," and therefore of "diversity of entrepreneurial interests," and thus of actual or potential competition.

Applying this framework, the Court held the existence of NFL Properties was not sufficient to prevent a "contract, combination . . . or conspiracy" and therefore avoid § 1 scrutiny. The teams are "sparately controlled, potential competitors with economic interests that are distinct from NFLP's financial well-being."

Despite holding the NFL's actions were subject to review under § 1, the Court did not pass on the merits, and noted some aspects of the NFL may provide a sufficient justification of its licensing practices under the Rule of Reason. Ultimately, it will be up to the district court to address the merits of the case and determine whether there is a § 1 violation.

Click below for more detail of American Needle, Inc. v. National Football League and links to media coverage of the case.

In 1963, the NFL teams formed NFL Properties (NFLP) to handle the development, licensing, and marketing of the teams' intellectual property. From then until 2000, NFLP granted nonexclusive licenses to numerous vendors to use the NFL's intellectual property. However, in 2000, the teams voted to give NFLP the power to grant exclusive licenses. NFLP began doing just that, including granting an exclusive license for video games to Electronic Arts in 2005 (an arrangement that has also come under antitrust scrutiny). As relevant to this case, NFLP granted an exclusive license to Reebok for headwear. In order to grant the exclusive license, NFLP did not renew any of its other licenses for headwear, including the license previously granted to Amercian Needle. American Needle brought suit, alleging the grant of the exclusive license violated Section 1 of the Sherman Act (the complaint also alleged a violation of Section 2, but this allegation is not relevant to this appeal).

The district court, after limited discovery, granted summary judgment in favor of the NFL and NFLP on the § 1 claim, holding in the context of licensing, the NFL teams "have so integrated their operations that they should be deemed a single entity rather than joint ventures cooperating for a common purpose." The Seventh Circuitaffirmed, noting that despite the potential disparate economic incentives of the teams, they can only function "as one source of economic power when collective producing NFL football," and that football can only be carried out jointly. American Needle petitioned for certiorari, which was granted in 2009. The questions presented were:

1. Are the NFL and its member teams a single entity that is exempt from rule of reason claims under Section 1 of the Sherman Act simply because they cooperate in the joint production of NFL football games, without regard to their competing economic interests, their ability to control their own economic decisions, or their ability to compete with each other and the league? 2. Is the agreement of the NFL teams among themselves and with Reebok International, pursuant to which the teams agreed not to compete with each other in the licensing and sale of consumer headwear and clothing decorated with the teams' respective logos and trademarks, and not to permit any licenses to be granted to Reebok's competitors for a period of ten years, subject to a rule of reason claim under Section 1 of the Sherman Act, where the teams own and control the use of their separate logos and trademarks and, but for their agreement not to, could compete with each other in the licensing and sale of Team Products?

The Supreme Court unanimously reversed. The Court first noted the distinction between § 1 and § 2 actions: § 1 requries concerted action, whereas § 2 can cover indepdendent action. Here, the question was whether the NFL's teams were capable of the concerted action necessary to support a § 1 claim. To make this determination, courts do not simply examine whether the entities at issue are legally distinct. This is because there are circumstances where entities are legally distinct but may not be capable of the concerted action § 1 was designed to police, such as a corporate parent and subsidiary. Also, there are circumstances where there is a single entity directly implicated, but there is still a potential § 1 violation, such as the context of a joint venture between competitors. Courts are therefore "moved by the identity of the persons who act, rather than the label of their hats." The key to the determination of whether there is the necessary "contract, combination . . ., or conspiracy" under § 1 is whether there is "concerted action—that is, whether it joins together separate decisionmakers." As stated by the Court (internal citations omitted):

The relevant inquiry, therefore, is whether there is a "contract, combination . . . or conspiracy" amongst "separate economic actors pursuing separate economic interests," such that the agreement "deprives the marketplace of independent centers of decisionmaking," and therefore of "diversity of entrepreneurial interests," and thus of actual or potential competition.

Applying this framework, the Court held a § 1 violation was possible by NFLP. The Court noted the NFL member teams "do not possess either the unitary decisionmaking quality or the single aggregation of economic power characteristic of independent action." This is because their actions are determined by "separate corporate consciousness," and they do not share common objectives. Further, they "compete in the market for intellectual property," and the decision to license their separately owned marks collectively and exclusively to a single vendor deprives "the marketplace of independent centers of decisionmaking." As summarized by the Court:

The NFL respondents may be similar in some sense to a single enterprise that owns several pieces of intellectual property and licenses them jointly, but they are not similar in the relevant functional sense. Although NFL teams have common interests such as promoting the NFL brand, they are still separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned.

Accordingly, the Court held the licensing of the NFL team marks through NFLP was not beyond the reach of § 1. The Court noted that the justifications provided by NFLP and the NFL teams are not relevant to whether § 1 is potentially implicated, but are instead potential facts relevant to the Rule of Reason analysis. The Court therefore reversed the Seventh Circuit's decision and remanded the case to the district court for analysis under the Rule of Reason.

To read the full decision in American Needle, Inc. v. National Football League, click here.

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